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Corporate Sector Comes Alive

The corporate sector has received scant attention from financial media of late. Individual firms, of course, continue to attract media interest, especially if a scandal develops, but few these days talk or write about the sector as a whole. This is unfortunate, for the behavior of corporate America has changed a profoundly during the last nine months or so. Whereas previously corporate managers showed a reluctance to spend on either new technology or expansion, they have rather suddenly become aggressive. This turn offers reason to look for a significant upswing in the economy’s productive potential and so its immediate and longer-run growth prospects.

Though corporate executives have remained guarded in their language, the statistical evidence is striking. Orders for non-defense capital equipment have, after a period of decline, surged during the past nine months to a 10 percent annual rate of increase, a sharp contrast from 2016, when such orders actually fell 0.5 percent. Real spending on new productive facilities have shown a 7.0 percent annual rate of expansion so far this year, significantly faster than in 2016 and twice the 3.5 percent yearly growth rate averaged during the five years ended last December. Spending on equipment has jumped to a 6.6 percent annual rate from an average of only 3.7 percent during those earlier years, while spending for business and industrial structures surged to a 10.9 percent yearly growth rate from an average of only 3.1 percent a year during those previous five years. The change is less dramatic for what the Commerce Department calls “intellectual property,” but still the statistics show an increase, a 4.7 percent annualized rate of increase this year so far from 4.2 percent a year during that earlier five-year period.

Should this accelerating pattern continue, it would heighten prospects for economic and income growth considerably. For one, such spending adds directly to the pace of overall economic growth. This year’s acceleration accounts for fully two-fifths of all GDP growth this year so far. More than this, such spending, by increasing the economy’s overall productive capacity, will give it room to expand more dramatically over the long haul. Perhaps most important of all, such spending will support increases in labor productivity and so form a basis for higher real wages. The past paucity of spending on productive facilities and equipment had already taken a toll on labor’s output per hour, holding its growth back to a mere 0.6 percent a year during the past couple of years. No doubt this poor showing contributed to the disappointing rate of wage growth to date. This year’s acceleration in capital spending is too recent to have had any effect on productivity yet, but should it persist, it would enhance output per hour and prompt a concomitant jump in real wages and so household incomes.

Of course, it remains an open question, whether corporate America will sustain recent strong capital spending. A lot surely depends on the success of Trump’s economic policy agenda. If the administration fails, especially with the promised tax reform, corporate managers may well rethink their recent expansionary enthusiasm. Important as tax reform is, however, it is far from the whole stay. Recent, more aggressive corporate spending might also reflect the regulatory relief offered by this administration and accordingly continue even if Congress fails to pass tax reform. It also may be that the legacy of fear engendered by the financial crises and great recession of 2008-09 has begun to lift. This, too, might help sustain the recent, stronger pace of spending growth. Whatever the future uncertainties, it pays to watch the patterns of such spending closely. They will offer a critical clue to the durability of this recovery and its strength going forward.